Red Lobster freaked out at lost traffic. Last year, it ran an aggressive promotion called Unlimited Endless Shrimp, pricing it at $20 and marketing it inside the company’s restaurants.
Customers did what Red Lobster told them to do. They ordered a lot of shrimp (which, apparently, was good for Red Lobster owner Thai Union, which supplied that shrimp). Red Lobster lost a ton of money, $31 million on that promotion alone. The company is now in bankruptcy and its new CEO has been atypically critical of prior management in court documents.
But it’s also mindful for brands as they prepare to jump into a value war: There are limits as to what brands can and should do.
Value is important this year. Some price promotion will be necessary to bring in traffic after customers shifted spending dramatically toward grocers over the past year. That price promotion will likely pressure margins and create challenges for many operators.
That value would be best engineered to ensure some level of profit margin.
At McDonald’s, the company is planning at $5 bundled meal next month, with a four-piece Chicken McNuggets, small fries, small drink and a choice of a McChicken or a McDouble. But that promotion was not profitable, and when the company first broached the idea to its franchisees, they balked.
It was only after McDonald’s beverage supplier, Coca-Cola, chipped in a few million that the deal was palatable enough for its franchisees.
“The $5 meal is an incredible affordable option for the customer,” the National Owners Association, an independent group of 1,000 McDonald’s franchisees, said in a letter to its membership over the weekend. “However, the McDonald’s business model is a penny profit business, with 10% to 15% margins. There simply is not enough profit to discount 30% for this model to be sustainable.”
NOA suggested—again—that McDonald’s revisit the Snack Wrap. The group suggested using chicken breasts already in the stores, theoretically cutting them up to provide the protein—much like Burger King does with its wraps. McDonald’s has resisted such suggestions, though the push for value could lead it to reconsider.
“McDonald’s controls the menu pipeline and must innovative on menu like Snack Wraps using our existing chicken breasts, creating affordable options with lower food costs so they are equally affordable for the owner/operator to sell,” NOA wrote.
Engineering value offers to ensure some profitability will be key for brands going forward. Bundled deals are great. But there is a big risk to them, namely that operators in, say, San Francisco can’t make the same profit selling a bundled meal at $5 as can operators in Des Moines.
Restaurant profitability has mostly recovered over the past year as inflation has eased and operators get the margin benefit of all those price increases.
But many operators are still dealing with rising costs on all kinds of expenses. That will necessitate creativity for brands to regain traffic. Make sure these value options can generate some margin for operators while providing a palatable price point for customers.
Red Lobster’s Endless Shrimp promotion wasn’t necessarily a bad thing. What was a bad thing was a promotion priced at a level that lost money for its operator. That’s an important lesson.